By Rich Best

In the eyes of the IRS, income is income and it must be taxed. For business owners, the definition of income goes a little deeper in that there is business income and there is personal income, and they both don’t necessarily have to be taxed. By allowing businesses to deduct many of the expenses associated with starting and running a business, the Internal Revenue Code actually provides at least 5 tax-advantaged ways to take income from your business.

In the most basic terms, the more opportunities there are to legally deduct business expenses, the less business income has to be reported. The net result is that the business owner can take more income from the business. Some of that extra income may come in the form of a nicer car to drive or a business trip that morphs into a pleasure get-away, but in some way, business owners can reap more economic benefit from their businesses when they take full advantage of IRS-sanctioned tax advantages.

How Deductions Translate into Income

The simple formula is this: As a taxpayer, a practitioner pays income taxes on personal income which is derived from the business. The less business income that is actually reported, the less practitioners have to pay in taxes, which means they keep more money. Considering all taxing entities – the fed, the state, Social Security – business owners can quickly find themselves in a 50% tax bracket. Therefore, each dollar that is deducted as a business expense saves 50 cents in taxes.

Here Are 5 Tax-Advantaged Ways to Take Income from Your Business:

Section 179 Deduction

Fortunately, the Fiscal Cliff deal that recently passed in Congress extends the generous Section 179 deduction. This part of the IRC allows a business to deduct the full cost of equipment in the year of purchase up to $500,000. Been putting off buying a new printer or shredder? Do it by the end of your tax year and take the full deduction.

Home Office Deduction

This presents one of the bigger opportunities to maximize your income from your business. Any expenses associated with running your business from your home can also be 100% deductible. Utilities, mortgages, insurance, and maintenance expenses can be expensed and deducted based on their proportionate use in the business.

CODG Expense Deductions

All or a part of expenses that are associated with the Cost of Doing Business can be deductible. Your vehicle can be paid for, in large part, through the deductions generated by its use in the business. If you like to travel, a good portion of your trip is a write-off if its primary purpose is related to your business.

Eliminate Excess Inventory

At the end of year if you still have any products taking up shelf space, it is probably costing you more money than if you just gave it away. And, in doing so, you can take a tax deduction on its gifted value while benefiting a charity.

Hire Your Kids

If you have children, you can transform their allowance and college savings contributions into a business deduction which will instantly put more money in your pocket. As long as your practice is not a corporation, you can hire your kids under the age of 18 and deduct their salary as an expense. You are not required to pay Social Security tax on their income, and, depending on how much total income they earn, they may not owe any income taxes.

Any one of these strategies could result in hundreds or thousands of dollars in tax savings. Used collectively, a practitioner could increase take-home income substantially. Each of these tax saving strategies involve many elements and implications that a practitioner should consider along with a qualified tax professional.


Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites.

 

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank.